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ANALYSIS: American's paper bankruptcy anniversary

Dornier 335

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Happy paper anniversary American Airlines, it was a year ago today that you filed for chapter 11 bankruptcy protection and ended an era.

The Fort Worth, Texas-based Oneworld alliance member long-held that it could achieve the cost savings and internal restructuring necessary to survive and prosper in the 21st century airline market - one where low-fares and low-costs dominate and everything from checked luggage to a bag of pretzels has a price tag - without going through bankruptcy. No other legacy carrier maintained a similar position and lived to tell the tale during the past decade.

The resignation of former chairman, president and chief executive of American-parent AMR Gerard Arpey and his replacement by company man Tom Horton complemented the bankruptcy filing on 29 November 2011. The intervening 12 months have been filled with labour strife, financial restructuring, headline maintenance issues and a very public merger proposal, to name a few.

American outlined a bankruptcy plan to cut costs by $2 billion annually while incrementally increasing revenue by $1 billion by 2017, this past February. Cost cuts included about $1.25 billion in savings from labour, while the new revenue is to come from "right-gauging" its fleet and organic growth.

From the beginning, the airline maintained that it would pursue a standalone restructuring plan.

Financial improvements

American has slowly improved its finances. It reported net profits excluding special items of $110 million in the third quarter and $142 million in the second quarter after a loss excluding special items of $248 million in the first quarter. It posted net losses during each quarter in 2011.

The carrier has made significant strides to reduce its labour costs. All of its unionised labour groups have ratified new multi-year contracts except its pilots (more on that later), management has been streamlined and it is in the process of reducing headcount by 13,000 people.

Other savings have come from rejecting leases on old aircraft, including Boeing 757-200s, Fokker F100s and McDonnell Douglas MD-80s, and renegotiating or refinancing American's debt. A pending up to $1.5 billion secured enhanced equipment trust certificates refinancing would hopefully reduce interest rates to below 6% from between 8.625% and 13%, and a deal with Embraer and Brazilian development bank BNDES reduced outstanding debt on AMR subsidiary American Eagle Airlines' Embraer regional jet fleet by more than a third to $1.08 billion from $1.75 billion.

Cost savings efforts have yet to hit the bottom line. Operating expenses have increased during each quarter this year to $6.38 billion during the three months ending 30 September. However, growth compared to a year earlier has slowed to less than 1% during the third quarter from 6.2% during the first quarter.

American reported that operating revenue also grew during each quarter. It rose 9.1% to $6.03 billion in the first quarter compared to 2011, up 5.5% to $6.5 billion in the second quarter and up less than 1% to $6.4 billion in the third quarter.

Outstanding long-term debt and capital leases are down, reaching $6.5 billion at the end of September from $6.9 billion at the end of the March.

Flightglobal Research

Maintenance concerns

Maintenance issues have plagued American. Flight delays and cancellations spiked in September and October due to increased maintenance reports by pilots that resulted in the airline trimming up to 2% of its flight schedule through early November. In addition, loose rows of seats resulted in 48 of the airline's 757-200s being temporarily grounded and additional seat clamps being installed on those aircraft and its Boeing 767-200s in October.

American has attributed the loose seats to fault clamps as well as simple wear and tear, however, recent external investigations have found that third-party maintenance providers that installed the seats may be partially at fault and that the airline knew about the issues before the seats came loose during revenue flights. The US Federal Aviation Administration is investigating the incidents.

The airline will close its Alliance maintenance base in Fort Worth by the end of the year and has cut its maintenance staff around the country.

Labour strife

Relations with pilots remain a thorn in American's side. The carrier filed a section 1113 request to reject its labour contracts in March but was unable to reach a consensual deal with its about 10,000 Allied Pilots Association (APA)-represented pilots. A US bankruptcy court judge approved a revised measure to throw out its pilots contract in August, which resulted in the spike in flight delays and cancellations in September and October, according to American.

Ray Neidl, an airline sector analyst at Maxim Group, compared the dispute to the one that helped bring down defunct Eastern Air Lines in the late 1980s, in September.

The pilots deal is critical to American's plan to increase the number of large regional jets in its feeder fleet and expand its domestic codeshares - both are key elements of its revenue growth strategy.

American and the APA reached a tentative agreement earlier in November and voting will take place from 1 December through 15 December. APA president captain Keith Wilson has called on pilots to avoid Eastern style "martyrdom" and ratify the agreement in a recent letter to the union's membership.

The merger question

Merger speculation has taken a backseat to American's labour and maintenance issues in recent months, but is still very much on the table. Horton and the airline's management made an about face on the possibility in May, when they said that they would consider the option alongside a standalone plan. This followed months of public pressure by US Airways and other groups to consider an offer.

The Tempe, Arizona-based carrier claims that a merger would result in $1.2 billion in cost synergies and create the number one carrier by market share in the East and Midwest of the USA. The resulting carrier would retain the American name and Fort Worth headquarters, and remain in the Oneworld alliance.

Combined American and US Airways domestic USA routes, November 2012
Innovata Flightmaps Analytics

American and US Airways signed a non-disclosure agreement in August and discussions are reportedly on going. American has until 28 January 2013 to present a restructuring plan to the court after which other parties can propose plans.

The bankrupt carrier has also signed a non-disclosure agreement with British Airways-parent International Airlines Group (IAG).

Much remains to be done in American's bankruptcy restructuring. It must complete its pilots contract, answer questions about the future of wholly-owned subsidiary American Eagle, finalise its restructuring plan and then potentially battle against a hostile takeover in court before it can exit the process.

Whether the airline will celebrate its cotton anniversary in bankruptcy is debatable. Recent court filings indicate that American plans to exit chapter 11 in March 2013 but if previous US airline bankruptcies are any indicator - United took three years and Delta almost two years - we could be here for a while.
 

OHGOON

No KoolAid please...
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The pilots deal is critical to American's plan to increase the number of large regional jets in its feeder fleet and expand its domestic codeshares - both are key elements of its revenue growth strategy.

American and the APA reached a tentative agreement earlier in November and voting will take place from 1 December through 15 December. APA president captain Keith Wilson has called on pilots to avoid Eastern style "martyrdom" and ratify the agreement in a recent letter to the union's membership.

I have not seen the TA but if it allows those larger regional jets to be outsourced to other entities, then with all due respect to Capt. Wilson, Vote it down!

Unless we all want to work for Regional wages and conditions for the rest of our careers we have to recognize that the line in the sand for scope must be drawn here and now. The hour is late and there will not be another chance to get this one right.
 
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